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Will the Mexico ETF Shine in 2014? - ETF News And Commentary

Mexican stocks had an excellent performance earlier this year
as foreign investors poured money into the country on optimism
over the election of President Nieto.

But like all emerging markets, Mexico also suffered the
consequences of the "taper talk", though the pain in Mexican
stocks and bonds was not as bad as some of the worst sufferers
like Brazil, Indonesia and Turkey.

Mexican Peso has stayed remarkable resilient (almost unchanged
YTD) while many currencies suffered double digit declines against
the US dollar. (Read:
Any hope for Brazil ETF in 2014
?)

Is the Growth Picking Up?

The growth this year has been a meager 1.2% against most
estimates of ~3.5% (worst since the 2009 recession). A number of
external as well as internal factors including slower demand for
Mexico's exports and government spending delays were responsible
for the slow growth.

The administration expects the growth to accelerate to ~4% in
2014. Many economists are optimistic about the economic recovery
and expect a healthy rebound next year.

Foreign investors still seem to be optimistic on Mexico. The
country saw investment inflows of $3.7 billion during the third
quarter after the "taper" fears subsided. (See all Latin American
ETFs
Here
)

Trade surplus grew in October, bolstered by the slow but steady
economic growth in the US, the destination for 80% of Mexico's
exports, which account for about 25% of Mexico's GDP.

Is President Nieto Delivering on His Promises?

President Nieto had promised to shake up the economy and he began
by passing important education, telecom and fiscal reforms. A
major energy reform is also likely to be passed soon as the
government and the main opposition party have agreed on most of
the crucial details of the legislative bill .

However the actual implementation of these reforms has not been
easy for him. He has been facing opposition from vested
interests. The delivery on promises made by him remains a "work
in progress" though he seems committed and 2014 may be a crucial
year for the country. (Read:
Emerging Markets ETFs: How to Pick Winners?
)

The energy bill has far reaching consequences for the Mexican
economy as the country currently has very restrictive energy
policies. Giving the private-sector oil firms a far larger
role in the Mexican oil industry, could attract billions of
dollars of foreign investment into the country.

Mexico is currently the world's ninth-largest oil producer, but
the country's
oil production
has fallen by 25% over the past decade to 2.5 million barrels a
day,

Manufacturing Activity Continues to Surge

Many US companies, including hi-tech companies, are opening their
manufacturing facilities in Mexico as wages in China and shipping
costs continue to rise. Moreover, the goods coming from Mexico
can enter the US duty-free due to NAFTA.

Mexico is now the world's biggest producer of
flatscreen TVs
. It is also a leading supplier of automobiles, aircraft and
medical equipment. Automobile production, mainly for exports has
been surging.

Mexico is currently the
fourth largest
auto manufacturer in the world and is expected to be one of the
top four by the end of this decade. The auto industry is likely
to see an investment of $10 billion in the country. Energy
reforms will further enhance Mexico's competitiveness as a
manufacturing destination.

Last year, Mexico's manufactured exports were more than the rest
of Latin America combined. Based on current trends, it is
estimated that by 2018 America will import more from Mexico than
from any other country. (Read:
Best New ETFs of 2013
)

Rising Middle Class and Soaring Consumption

As a result of macroeconomic stability, middle class wealth has
been rising. Average income has doubled in the past 15 years
and the average number of school years Mexicans attend has
doubled in the past four decades.

Improving education and skills, and rising participation of women
in the workforce has led to improving family incomes.

Rising family incomes and urbanization have resulted in upward
mobility and increasing consumption. Per IMF, spending has grown
from about 17% of GDP in 2000 to about 23% of GDP in 2012. Going
forward, domestic consumption is expected to continue to fuel
growth.

Launched in March 1996, the fund now has more than $2.4 billion
in AUM. The assets are invested in a basket of 51 holdings;
America Movil occupies the top spot with almost 18% asset
allocation.

Among sectors, Consumer Staples have the heaviest allocation
(27%) while Financials and Telecom round out the top three.
Thanks to its heavy exposure to consumer staples and telecom
sectors, the fund will benefit from growing consumer demand in
the country.

At the same time, there is a risk that the profitability of some
of the giant operators in these areas will come down as the
market opens up. Further, Mexico is not cheap; it trades at
substantial premiums to its regional peers and other emerging
markets.

However, the premium valuation for the ETF appears to be
justified given the growth potential. In fact, this ETF now
appears to be ready to rebound and has been outperforming the
broader emerging markets ETF (EEM) as well as the regional peer
Brazil ETF (EWZ) over the past few weeks.

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